Tuesday, September 26, 2006

Out of the frying pan, into the soup?

Going private, like chicken soup, couldn’t hurt the Tribune Co., but restructuring won’t matter if the company can't solve the fundamental problems facing its newspaper and broadcast units.

Unlike chicken soup, whose palliative properties have been verified by medical science, private ownership, per se, isn't necessarily as soothing as a steaming bowl of matzo balls.

For it to work, a company has to have a solid plan to build its value by increasing profits through higher sales and tightly controlled expenses.

Tribune has formed a special committee of directors to assess strategic alternatives for maximizing shareholder value. Among the chief alternatives are: (a) auctioning off some or all of the company’s assets; (b) raising billions to buy the company’s stock from public investors so it can be run as a private company; (c) a combination of the above, or (d) something completely different.

The best thing about private ownership is that it lets managers make long-term, strategic business decisions without worrying about the blips in sales or profits that give fits to the public markets. This might give management room, for example, to cut profits for a predetermined period of time to invest in such new projects as specialty print publications or new-media initiatives.

Some analysts question whether Tribune really has the ability to go private at all, citing a formidable load of more than $4.6 billion in debt (its bonds Friday were downgraded to “junk” level) and general angst in the financial community as to the future value of newspaper and TV assets.

Even if Tribune were successful in going private, getting Wall Street off its back wouldn’t get the company off the hook.

When a company goes private, it essentially mortgages itself the way you lever up when you buy a house. But there’s a difference:

In addition to borrowing somewhere in the neighborhood of 75% of the money required to buy its outstanding stock from the public, a company taking itself private has to raise the other 25% of the purchase price in the form of equity contributed by one of the several large private funds that specialize in such transactions.

In so doing, the company trades the oversight of the public markets for the equal, if not greater, scrutiny of its lenders and private equity investors.

While the lenders are happy with the return of their funds plus interest, private equity investors only make money if the company eventually is sold for significantly more than its value when it was taken private. Investors ordinarily seek exit returns of greater than 25% within three to five years after acquiring a business.

The substantial gains targeted by equity investors can be produced only if managers can increase sales and profits at a brisker pace than most media companies have achieved in the last few years.

Media companies aiming to meet the goals of private equity investors will have to implement more effective solutions than they have to date to address eroding audience, decreasing ad market share, sluggish sales growth, rising costs and growing competition from digital media and, in the case of newspapers, lower-cost print alternatives.

Unless there's a plan to soup up Tribune when it flees the frying pan of the public markets, it likely will find itself in hot water under private ownership.